Is income becoming more polarized in Italy? A closer look with a distributional approach

During 1990’s and early 2000’s income inequality in Italy has been higher than that observed in many other OECD countries, but has not displayed any significant trend, upward or downward. For the most part, this evidence relies on summary measures of inequality. By their very nature, summary indices of inequality may not capture aspects such as multi-modalities and polarization. This paper applies a non-parametric tool, the “relative distribution”, to describe patterns of changes on the entire Italian household income distribution over the period 1989–2006. This approach also allows for a decomposition of the relative density to isolate changes due to differences in location from changes due to differences in shape. This is done in order to distinguish whether the changes in distribution have taken the form of a polarization or of a convergence of incomes toward the middle income classes. A similar decomposition enables one to analyze the impact of selected covariates on the income distribution. During the period Italy experienced a significant increase of household income polarization, which has particularly affected incomes below the median. In addition, this relative polarization is mainly correlated to changes in the returns to household-head occupational status.